By David Jolly and Heather Timmons

The New York Times

Monday 21 January 2008

Paris - Global stock markets plunged on Monday as fears spread that the turmoil in United States mortgage markets is spreading. Indexes in Europe fell as much as 7 percent after a huge selloff in Asia.

"There's something approaching panic in the market," Holger Schmieding, the chief European economist at Bank of America in London said by telephone. "There's been a reassessment in the market of the U.S. economic outlook, with most people now thinking that there will be a recession," and investors are starting to reconsider the idea that the rest of the world "will remain aloof from U.S. problems."

The selling began in Sydney, with Australian stocks falling nearly 3 percent for an 11th consecutive decline. Major markets in Asia followed suit, with the benchmark Nikkei 225-stock average in Tokyo falling 3.9 percent, the Hang Seng in Hong Kong falling 5.5 percent and the benchmark mainland Chinese index falling more than 5 percent.

European shares were on track for their biggest decline in more than four and a half years as United States recession fears rattled investors. In afternoon trading, the Dow Jones Euro Stoxx 50 was down 5.7 percent. The CAC 40 index in Paris was down 5 percent, having fallen more than 7 percent at one point. The Dax 30 in Frankfurt was down 6.25 percent, and the FTSE 100 in London was down 3.7 percent.

United States markets are closed on Monday in observance of Martin Luther King's Birthday. Stocks received no lift on Friday despite an announcement that the Bush administration would seek a stimulus package of as much as $145 billion. Market participants said that meant investors were convinced that an American recession is looming, and economists and strategists said the effect would span the globe.

No matter how many bridges, roads and power plants China builds, or new cars India sells, a downturn in the United States will batter Asian economies, they said.

Investors in Asia have been in a state of denial about the possibility of a recession in the United States, said Adrian Mowat, chief strategist for JPMorgan in Asia. But now, he said, "there's no debate about it."

Instead, he said investors were asking "how long and how deep" the recession might be.

In recent months, some emerging market investors have preached the idea that fast-growing areas like most of Asia have "decoupled" from developed markets, meaning the economies of the two groups no longer move in tandem. The investing adage "When the United States sneezes, Asia catches a cold" no longer applies, the proponents of decoupling argue.

But a recent slump in emerging markets, capped by Monday's slide, means investor sentiment is changing.

Mr. Mowat said it did not matter whether global markets were separated by geography or asset class because "we trade together in corrections."

Deborah Schuller, a regional credit officer for Moody's Investor Service in Asia, said, "If the United States consumer quits buying things, it is going to hurt" Asian economies.

Most rated corporations in Asia will be able to withstand nine months of United States recession, but if hard times in America stretched to 12 months or more, there could be serious problems, she said.

Worries about the Chinese economy are also giving investors in Asia heartburn.

The country's private property market is in the midst of a shakeout, and scores of small developers have gone out of business. Meanwhile, fears of inflation have been looming for months. Shanghai's composite index closed down 5.1 percent at 4,914.44. The Hang Seng's 5.5 percent fall was the biggest fall since the Sept. 11, 2001, terrorist attacks in the United States. The Hong Kong index fell more than 5 percent last Wednesday.

The decline in Japanese stocks took the market to the lowest levels in more than two years on concerns that a United States recession could be accompanied by a local one. The Nikkei is now down more than 13 percent in January.

Th. e Japanese Finance Ministry said Monday that growth was slowing in five of Japan's economic regions, which have been hit by stagnant housing investment and the poor employment.

The Bombay Stock Exchange's Sensex index plummeted 7.4 percent and suffered its biggest-ever point loss of 1,353 to close at 17,605.35.

Hardest hit were some of the most valued Indian companies, including Reliance Communications, Tata Steel and Reliance Industries.

There may be more downturns in store for Asia, particularly as banks report the fallout from their investments in the United States mortgage market. Companies "have not announced their year-end numbers yet," Schuller, of Moody's, said, and if they are holding subprime assets, they may need to write-off their value, she said. "They are going to be taking these 25 to 30 percent haircuts we're seeing on Wall Street," she said. "I think it is going to shock people."

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David Jolly reported from Paris and Heather Timmons from New Delhi. Tim Johnston contributed reporting from Sydney, and Martin Foster from Tokyo.

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